For How Long will the Era of Cheap Silver Prices Continue?

One of the running themes of the silver market since the economy recovered from the financial crisis has been an apparent disconnect between silver prices and the realities of supply and demand.

Even as demand for the precious metal has consistently been strong from both investors and industry, the price of silver has stagnated between about $15 and $20 per ounce. Essentially, silver prices have gone sideways for years.

However, it’s still worth noting that silver has risen over 17% from its lows in 2016.

Gold has been somewhat stronger over that period by comparison: The yellow metal is up about 24% from its 2016 nadir. The gold-to-silver price ratio is now near its highest (in favor of gold) in a decade.

As far as fundamentals are concerned, this relationship seems backward. New data from the Silver Institute reveals that silver demand rose last year while supply actually fell.

The Strange Logic of the Silver Market

This dynamic—falling supply and rising demand—would seem to be the perfect recipe for higher silver prices.

What makes the historically high level of the gold-silver ratio especially odd is how silver is used in industrial applications. Whereas much of the existing gold supply (before even accounting for newly mined gold) is recycled, roughly half of the silver that is produced each year gets used up by industry.

As a result, the annual growth and replenishment of the silver supply is not nearly as high as mining output would imply at first glance.

Moreover, the latest mining data hardly suggests a supply glut. The numbers from the Silver Institute, which were supplied by research from GFMS Reuters, show that silver production dropped for the second consecutive year in 2017 after thirteen straight years of rising output.

It was also the fifth consecutive year of a supply deficit from silver mines.

Jamie Dimon President and chief executive officer of JP Morgan Chase,

An Era of Cheap Silver Prices, But For How Long?

There is a simple answer to the question posed in this article’s headline: The supply deficit apparently means nothing.

It may be a moot point because, unlike the global gold market, silver futures trading is relatively small. This makes it possible for large institutional stakeholders—most notably JPMorgan—to influence [manipulate] the futures market disproportionately by buying or selling in very large quantities [via artificially represented paper buy sell].

Thus, merely a handful of deep-pocketed players can exert a considerable degree of control over silver prices.

Although some have dismissed JPMorgan’s outsized influence over silver as a conspiracy theory, the bank’s massive position in silver is a matter of public knowledge and open discourse. There’s nothing secret about it. The logical conclusion about how this has impacted prices is manifest.

1923 Hyperinflation in Germany: A woman burns German marks in the furnace to heat the home during the peak of the Weimar Germany hyperinflation. The currency had devalued so much, it was cheaper to burn the German mark than to use it to buy coal or firewood. So their currency was more valuable as mere paper (to be burned) than as a money (to be spent).

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